Suppose Alcatel-Lucent has an equity cost of capital of 9.6%, market capitalization of $11.40 billion, and...

 

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Suppose Alcatel-Lucent has an equity cost of capital of 9.6%, market capitalization of $11.40 billion, and an enterprise value of $15 billion. Assume Alcatel-Lucent's debt cost of capital is 5.7%, its marginal tax rate is 38%, the WACC is 8.14%, and it maintains a constant debt-equity ratio. The firm has a project with average risk. Expected free cash flow, debt capacity, and interest payments are shown in the table: a. What is the free cash flow to equity for this project? b. What is its NPV computed using the FTE method? How does it compare with the NPV based on the WACC method? a. What is the free cash flow to equity for this project? The free cash flow to equity for this project is: (Round all answers to two decimal places. Use a minus sign to indicate a negative number.) Year FCFE ($ million) 0 1 2 3 b. What is its NPV computed using the FTE method? NPV is $ million. (Round to two decimal places.) How does it compare with the NPV based on the WACC method? (Select the best choice below.) A. The NPV computed using the FTE method is always lower than the NPV based on the WACC method. B. The NPV computed using the FTE method is always higher than the NPV based on the WACC method. C. The NPV computed using the FTE method cannot be compared to the NPV based on the WACC method. D. The NPV computed using the FTE method is the same as the NPV based on the WACC method. Data table (Click on the following icon in order to copy its contents into a spreadsheet.) 1 52 38.08 2.66 Year FCF ($ million) D=dxV² Interest 0 - 100 46.75 0.00 2 105 15.98 2.17 3 72 0.00 0.91 1 Suppose Alcatel-Lucent has an equity cost of capital of 9.6%, market capitalization of $11.40 billion, and an enterprise value of $15 billion. Assume Alcatel-Lucent's debt cost of capital is 5.7%, its marginal tax rate is 38%, the WACC is 8.14%, and it maintains a constant debt-equity ratio. The firm has a project with average risk. Expected free cash flow, debt capacity, and interest payments are shown in the table: a. What is the free cash flow to equity for this project? b. What is its NPV computed using the FTE method? How does it compare with the NPV based on the WACC method? a. What is the free cash flow to equity for this project? The free cash flow to equity for this project is: (Round all answers to two decimal places. Use a minus sign to indicate a negative number.) Year FCFE ($ million) 0 1 2 3 b. What is its NPV computed using the FTE method? NPV is $ million. (Round to two decimal places.) How does it compare with the NPV based on the WACC method? (Select the best choice below.) A. The NPV computed using the FTE method is always lower than the NPV based on the WACC method. B. The NPV computed using the FTE method is always higher than the NPV based on the WACC method. C. The NPV computed using the FTE method cannot be compared to the NPV based on the WACC method. D. The NPV computed using the FTE method is the same as the NPV based on the WACC method. Data table (Click on the following icon in order to copy its contents into a spreadsheet.) 1 52 38.08 2.66 Year FCF ($ million) D=dxV² Interest 0 - 100 46.75 0.00 2 105 15.98 2.17 3 72 0.00 0.91 1

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a To calculate the Free Cash Flow to Equity FCFE for this project we need to consider the following ... View the full answer